Central Bank Independence in Autocracies

Abstract

Despite a recent surge in the academic literature on central bank independence (CBI), little is known about its drivers in authoritarian states. Our theoretical argument starts from the simple idea that no country is an island. Whereas autocratic regimes possessing abundant resource wealth have access to large amounts of hard currency to pay for imports, their resource-poor peers have to earn hard currency through an opening to international trade. These resource-poor authoritarian rulers will opt for CBI in order to insure against the disruptive political and economic forces arising from their reliance on international trade. To test these predictions, we draw on carefully selected historical cases and augment them with a large-N analysis. We show that countries that engage in more trade and have fewer resources tend to make their central banks more independent. Our findings underscore the importance of incorporating international trade when analyzing the institutional design of central banks.

Keywords: Central bank independence, autocracies, trade dependence

JEL Classification: F5, E42, E58, F52